Pakistan May Extend Rate Pause as Bin Laden Fallout Intensifies

Pakistan is set to extend a six-month pause in interest-rate increases as inflation eases and the government prepares to tighten fiscal policy amid concern the killing of Osama bin Laden will lead to a cut in U.S. aid.

The State Bank of Pakistan will leave the discount rate at 14 percent, among the highest in the world, according to all 10 economists surveyed by Bloomberg News. The decision is scheduled for 4 p.m. in Karachi tomorrow, a week before the government is due to deliver its budget.

The central bank raised rates in three consecutive meetings from July to November, blaming excess state spending for pushing inflation to more than 15 percent late last year. The government may be forced to cut spending in its May 28 budget after the discovery of al-Qaeda leader bin Laden in Pakistan led some U.S. lawmakers to call for a reduction in aid.

“The central bank is likely to prefer to wait and see the steps the government takes in the budget and will keep the rate unchanged,” said Saad Khan, an economist at Arif Habib Ltd., a brokerage in Karachi. “Another reason not to raise rates is the easing in inflation last month.”

Pakistan’s consumer prices rose 13.04 percent in April from a year earlier, after a 13.16 percent gain in March, a Federal Bureau of Statistics report showed on May 3.

The South Asian nation has received $14.6 billion in economic and military aid from the U.S. since 2005 to help revive growth and fight Taliban militants along the border with Afghanistan.

Insurgent Groups

Senator John Kerry, the Massachusetts Democrat who leads the Foreign Relations Committee and was an architect of a 2009 bill committing $1.5 billion annually to Pakistan, said this week many members of the U.S. Congress are questioning that aid after bin Laden was found sheltering in the country. They say President Asif Ali Zardari’s administration must crack down on insurgent groups that target American forces in Afghanistan.

The government needs external aid as it aims for economic growth of 4.2 percent next fiscal year and a reduction in the budget deficit to 4.5 percent of gross domestic product, the Finance Ministry said last month. The shortfall is expected to reach 5.5 percent this year, compared with the official target of 4 percent, it said April 27.

The International Monetary Fund told Pakistani economic officials in a weeklong review of the economy that ended May 17 that the government needs to keep cutting the deficit to take pressure off monetary policy and allow more credit to companies.

‘Better Understanding’

“The budget announcement will help the central bank to develop a better understanding of how to mix monetary with fiscal policy,” said Khalid Iqbal Siddiqui, head of research at Invest & Finance Securities Ltd. in Karachi.

The Washington-based IMF stopped disbursing money to Pakistan in May last year after the country failed to meet conditions attached to an $11.3 billion loan first issued in 2008. In December, the fund approved a nine-month extension of the loan to give Pakistani authorities time to comply with some elements of the agreement, including implementing an overhauled sales tax.

President Zardari announced in March a 15 percent surcharge on income tax to counter losses from the nation’s worst monsoon flooding last year, and an increase in import duties to 2.5 percent from 1 percent. The government will also withdraw sales tax exemptions on fertilizer, pesticides and tractors.

Pakistan’s $162 billion economy, sapped by terrorism and floods in 2010, is lagging behind emerging markets including neighbors India and China, which helped lead the global economic rebound from the deepest postwar recession.

Fuel Prices

The government raised domestic fuel prices as much as 12 percent on May 1, after increasing them 13 percent on April 1, to bring charges in line with international oil prices, according to the Islamabad-based Oil & Gas Regulatory Authority.

“The fuel-subsidy reduction and the tax measure indicate the budget will bring tight fiscal policy,” said Arif Habib’s Khan.

The Pakistan rupee has fallen 0.2 percent to 85.74 against the dollar since the current financial year started July 1. The Karachi Stock Exchange 100 Index has gained more than 22 percent this financial year after advancing 36 percent in the previous year ended June 30.

“Once the impact of the tight budget starts to show by the second quarter of next fiscal year, we might see an easing in monetary policy, which will be good for the private sector and support growth,” said Khan.

To contact the reporter on this story: Farhan Sharif in Karachi, Pakistan at Fsharif2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net